December 31, 2013

You’ve heard the saying, it’s all about location, location, location. But for filmmakers these days, the shooting location is more about state tax breaks than scenery or terrain. Nearly 40 states get film credits from the fed, which they can use to lure the entertainment industry to within their borders. Some say this is a bad practice, while others say it is just sharing the wealth.

Seeing Stars

The use of film credits has skyrocketed, from $2 million a decade ago, to $1.5 billion in 2012, according to the non-profit Tax Foundation. Sharing the wealth is a good thing, it seems, though many entertainment industry trade workers in California disagree. With the majority of the biggest movies now shot elsewhere, many are finding it harder to make a living.

In fourteen of the states receiving film credits, those credits can be sold, giving rise to a new endeavor, that of brokering the credits. Brokers sell the credits to wealthy individuals looking for tax saving, and who may have no connection whatsoever to the movie industry. The buyers pay a discount price for the credits, and end up with state tax savings, often around 15%. Filmmakers get their money faster than if they waited for the related tax refunds, which is frequently the deciding factor in whether a movie gets made at all.

“Film producers, who often cannot use the credit themselves, particularly if their projects show losses, can form limited partnerships with wealthy investors who have passive income to shelter. The partnerships allow filmmakers to trade the credits for the investors’ cash.” (LA Times)

Money generated by the credits may cover one-third of the movie production costs and may add several weeks of shooting time that would otherwise be unaffordable. Actor/director Ben Affleck told the Los Angeles Times, part of his new movie “Live by Night” will be filmed in Georgia, a popular state based on the film credit availability. “It comes down to the fact that you have X amount of money to make your movie in a business where the margins are really thin.”

Another director told the Times it’s no longer about which location has the right scenery. Instead, they “recreate” the scenery they want, and pursue the best tax credits.

An interesting side note is, Affleck and his friend and fellow director Matt Damon, are both big supporters of the film tax credits which reduce taxes. Yet they have both on record saying their taxes should be raised.

How Do Film Credits Work?

Here’s an example culled from the LA Times.

A wealthy Georgia oncologist purchases a film credit voucher which represents a credit against his state tax bill. The face value of the voucher is $92,840 and the purchase price is $81,699 (88 cents/dollar). The difference is his tax savings, of $11,141. Out of the total paid, the broker takes a commission of $1,857, and the rest of the purchase price goes to the filmmaker. The filmmaker gets funding immediately, rather than waiting for a state tax refund. The broker gets a cut. And the oncologist saves taxes. Win/win/win.

Yet, it’s not all rosy. Here are some points made by critics of film credit practices:

  • Hollywood trade workers, like electricians, carpenters, caterers, and other behind the scene workers say they are losing their livelihood. The top grossing films shot in California have dropped 60% in 15 years.
  • Some say the credits don’t produce long- term benefits for the communities where filming occurs.
  • Others say the main beneficiaries are those not connected with the film industries.
  • Still others say this practice allows corporations to shelter income from something unrelated to their activities.

All valid criticisms, but since the deals are only made with the cooperation of movie making insiders, the entertainment industry may just be cannibalizing itself in an effort to stay alive.

One Tax Credit Expires, Hollywood Scrambles

A real-time example of Hollywood cannibalizing itself to stay alive is the recent news that, at the end of 2013, one of the many tax credits (worth millions) Hollywood uses is expiring. In an industry that depends heavily on packaged federal and state film credits, to see even just one expire is causing a bit of a panic.

Though not recommended, as long as a filmmaker has a day’s worth of filming with dialogue completed this year, along with a script, budget, and investor documents, they can still use the credit next year. This means that many are rushing to meet the deadline. “Some financial planners who package the deals have pushed producers … to start shooting in hopes of keeping their projects eligible for the write-off even after it passes from the scene” This way, even if the people filmed aren’t actually in the final cut, and even if the movie flops at the box office, investors still make money. (LA Times)

So how does this work? Why do federal and state governments offer these lucrative film tax credits to keep the movie biz afloat, and in turn, keep the wealthy investors’ pockets padded? Maybe to keep the filming on US soil, or to keep the art form alive, or just because it’s good for business.

Or maybe because, without these credits, the industry would fold.

Photo: DigitalTrends